Buttoning up Burberry: directors’ share purchases

Would you buy shares in the company you work for? Whilst this would no doubt depend on numerous things, understanding why employees and in particular directors buy shares in their own company can provide useful insights into corporate governance, market confidence, and strategic signalling.

This article will explore these reasons, using the recent purchase of £275,000 worth of shares by Burberry directors as a case study.

Why directors buy shares in their company

Signalling Confidence

When directors purchase shares in their own company, it often signals to the market that they have confidence in the company’s future. This can be particularly potent following adverse events or during periods of uncertainty. Investors tend to view insider buying as a positive sign, indicating that those with the most intimate knowledge of the company’s operations believe it is undervalued or poised for a rebound.

Aligning Interests

Share purchases by directors can align their interests more closely with those of shareholders. By having a personal financial stake in the company, directors may be more motivated to make decisions that enhance shareholder value. This alignment can lead to better corporate governance and more prudent, growth-oriented decision-making.

Underpinning Turnaround Strategies

In cases where a company is undergoing a turnaround, insider buying can be an effort to demonstrate and bolster faith in the new strategic direction. Directors may use their share purchases to underscore their commitment to the turnaround plan and to reassure shareholders and the market at large.

Capitalising on Low Prices

Directors might also buy shares when they believe the market has undervalued their company. By purchasing shares at a low price, they stand to gain if their assessment is correct and the share price increases. This can also be seen as a strategic investment, showing that they are putting their money where their mouth is.

Case Study: Burberry

Background of Burberry

Founded in 1856, Burberry is a British luxury fashion house known for its distinctive tartan pattern and iconic trench coats. Over the years, Burberry has evolved from a brand synonymous with British heritage to a global fashion powerhouse with a strong presence in apparel, accessories, and fragrance markets. Despite its storied history and brand strength, Burberry has faced challenges in recent years, including shifts in consumer preferences and economic uncertainties affecting key markets like China and North America.

Recent Developments

The recent purchase of Burberry shares by its directors comes at a critical point for the company. American Joshua Schulman took the helm as CEO earlier this month, replacing Jonathan Akeroyd, amidst a backdrop of a profit warning and suspension of the 2025 dividend.

Chair Gerry Murphy described the market as “tougher,” with customers becoming more cautious and conservative. The company has felt the impact of restrained spending from China and North America, key markets that also influence sales in Europe due to tourism.

Burberry anticipates an operating loss for the first half of 2024/25 if current trends continue. Despite these challenges, Murphy expressed confidence that cost savings will lead to improvements in the second half of the year, bolstering Burberry’s competitive position.

Directors’ Share Purchases

The share purchases by Burberry directors totalled £275,000 and represent a significant vote of confidence in the company’s turnaround strategy under Schulman’s leadership. This move can be interpreted through the lens of the motivations discussed earlier:

1. Signalling Confidence: The directors’ purchases suggest that they believe in Schulman’s strategic vision and the company’s potential for recovery. This can reassure other investors and help stabilise the share price.
2. Aligning Interests: By investing their own money into Burberry shares, the directors are aligning their interests with those of the shareholders, demonstrating a commitment to driving long-term value.
3. Underpinning Turnaround Strategies: The timing of the purchases, just as Schulman takes over and in the wake of a profit warning, underscores a belief in the impact of the new leadership and the turnaround plan.
4. Capitalising on Low Prices: With the share price significantly down, the directors likely see this as a good time to buy. If the turnaround is successful, they stand to gain from any subsequent appreciation in the share price.

Strategic Implications

For business students, the Burberry case highlights several strategic implications:

• Market Perception: Insider buying can influence market perception and potentially stabilise share prices during turbulent times. It sends a message of internal confidence and can be a catalyst for broader investor support.
• Turnaround Execution: The effectiveness of a turnaround strategy often hinges on the confidence and alignment of the leadership team. Directors buying shares can be a powerful signal of this alignment and commitment.
• Risk Management: Directors are often privy to more detailed and forward-looking information than the average investor. Their decision to buy shares can reflect a calculated risk based on this deeper understanding of the company’s prospects.

Insider buying vs insider trading

It’s important to distinguish insider buying from insider dealing. Insider buying refers to company directors or executives purchasing shares in their own company through legal means as discussed above. This is entirely legal and regulated by financial authorities to ensure transparency and fairness. On the other hand, insider trading, also known as insider dealing, involves the illegal buying or selling of a company’s stock based on non-public, material information. This practice undermines market integrity and is subject to severe penalties. Understanding this distinction is crucial for appreciating the significance of insider buying as a positive indicator for investors. A nice article on the perils of insider trading can be found here.

Conclusion

Directors buying shares in their own company is a signal that combines elements of confidence, strategic alignment, and calculated risk-taking. The recent share purchases by Burberry directors highlight these dynamics, offering a real-world case study of how insider buying can play an important role in corporate governance and market perception. For business students, this case underscores the importance of understanding the motivations behind insider transactions and their potential impact on a company’s strategic direction and market performance.